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Smaller law firms are struggling to retain their junior partners in advance of tough new capital requirements set out by HM Revenue & Customs in its crackdown on fixed-share partners avoiding PAYE tax, an executive search firm has claimed.

The Chancellor George Osborne yesterday confirmed that there would be no delay in introducing the changes to the way LLPs are taxed, which has left many firms seeking funding for capital contributions.

Reformed HMRC rules dealing with the taxation of partnerships will obstruct “innocent” firms trying to invest in their businesses and force them to modify their profit-sharing arrangements, according to a leading firm of accountants.

The government’s proposed tax reforms for limited liability partnerships (LLPs) are “haphazard”, “incoherent”, backward looking, and would introduce a “bizarre distinction” between business entities, according to the Law Society.

HMRC is set to scrutinise the status of law firm partners after measures announced in the Budget. The Treasury is to consult on removing the presumption of self-employment for LLP partners and on countering the “artificial allocation of profits to partners”.

A former fixed-share partner at south-coast law firm Lester Aldridge has lost his appeal against a ruling that he was a partner and not an employee in the limited liability partnership and so unable to claim unfair dismissal.

Is partnership an “inefficient and unattractive” structure that should be ditched to survive in the new legal marketplace, or is it a viable current model with much to offer lawyers wanting flexible governance and discretion? Both sides were put at a conference this week.

With the days of full distribution of profits to partners coming to an end, Mark Waddilove, a tax director at accountants Baker Tilly, and Jonathan Cheney, a managing associate at national law firm Addleshaw Goddard, explain how a corporate member of an LLP can mitigate the tax charges on retained profits

The number of incorporated law firms has risen sharply in the past year, with more than a fifth of legal practices now limited companies. According to Solicitors Regulation Authority figures, 2,400 of the 10,973 law firms as of July were incorporated companies, compared to 1,898 a year before – a rise of 26%.